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Mises on the Evenly
Rotating Economy
/. Patrick Gunning
T
he term evenly rotating economy (ERE) was introduced by Ludwig
von Mises in order to distinguish the concept of static equilibrium used
by economists from equilibrium models used by students of physical
systems. In Mises' view, the mathematical model of physical science had been
unwisely extended to economics by writers who had failed to recognize the
essential difference between the subject matter of human and nonhuman science.
This lack of wisdom was evident from the fact that when even the best mathematical economists set out to describe real economic activity, they had to resort
to making assumptions or hypotheses about entrepreneurial activities. In introducing the term ERE, Mises was not proposing that economists adopt a
new method of describing economic activity. He was merely proposing that
economists use a more accurate phrase to describe the method they had always
used but that some economists apparently failed to appreciate.1
The phrase evenly rotating economy was adopted by only one other
economist of note, Mises' student Murray Rothbard. Mainstream economists
continued to use the terms static equilibrium or general equilibrium. Of course,
the words one uses are not crucial. Mises could have continued to use the term
equilibrium if he had convinced his readers to interpret it according to its logical
meaning and not its mathematical meaning.
The mathematical meaning of equilibrium derives from an analogy with
the laws or regularities of nonhuman phenomena. An example is equilibrium
in hydraulics. Hydraulic equilibrium is based on the law of gravity and describes
a mathematical relationship between conditions that prevail when the system
is set into motion and the conditions that prevail after some period of time
when the motion stops. The logical meaning of equilibrium is based on an
analogy with the logic of human action. Equilibrium in human action refers
to a hypothetical point in time when a human being stops deliberating and
proceeds to perform the behavior that is specified by an assumed plan of action. For an economy, the ERE is an analogous hypothetical point in time when
everyone stops deliberating and proceeds to perform the behavior specified by
some general plan of action.
124 • The Review of Austrian Economics, Volume 3
When equilibrium is given a logical meaning, one is naturally led to conceive of the preequilibrium actions that would be necessary for the equilibrium
to be achieved. Regarding equilibrium in an individual action, one is naturally
led to think about the deliberation and experimentation that precedes the point
when the individual decides to stop deliberating and to carry out the plan of
action. Regarding equilibrium in an economy, one is naturally led to think about
the entrepreneurship that activates the "market process." In fact, the concept of
equilibrium in an economy has no other use than to help the economist elucidate
entrepreneurship. Equilibrium is a notion developed by the economist for the
distinct purpose of delineating the entrepreneurial part of economic interaction
that the economist knows by intuition (a priori) to be present. The ERE is an
imaginary state in which all of the essential economic functions—production,
saving, consumption, and factor supply—are performed by automatons. Unless
an economist constructs an image of such a state, he finds it impossible to comprehend the full range of entrepreneurship in economic interaction.2
The distinctions between the logical and mathematical methods and between logical and mathematical meanings are crucial in Misesian economics.
Failure to understand them is a sure route to a failure to understand the meanings of many terms and passages in Mises' economics writings. An example of
such a failure is a 1985 critique of Mises' concept of the ERE in the American
Economic Review by Tyler Cowen and Richard Fink. Cowen and Fink (C-F)
correctly suggested that the ERE is an alternative to the mathematical interpretation of the Arrow-Hahn-Debreu model of general equilibrium. However,
they went on to say that there are "serious inconsistencies in both the nature
of the ERE and its suggested uses." They proceeded to present criticisms of four
uses that they claim were proposed by Mises and Murray Rothbard.
This article is intended to absolve Mises of the C-F criticism. By means of
quotations, text references, and argument, I shall attempt to show that C-F
misrepresented Mises' views, that they failed to identify the fundamental use(s)
that Mises claimed for the ERE, and that their own evaluation of the usefulness
of the ERE is faulty. More importantly, I will argue that Mises demonstrated
that equilibrium constructs, properly conceived, are not only useful but necessary.
Without them, there is no way to provide a meaningful description of the most
significant activity that occurs in a market economy: entrepreneurship.3
This article proceeds by addressing each of the four C-F criticisms in turn.
In the process, Mises' ideas and the apparent reasoning behind them are identified and discussed.
Explanation, Prediction, and Disequilibrium
The first use that C-F claim Mises suggests is that "the ERE can be used to
explain or 'predict' the direction of change" (p. 866). I could find no remark by
Mises on the Evenly Rotating Economy • 125
Mises to substantiate the C-F view that Mises makes this suggestion. It is true
that Mises says that complex phenomena can only be studied by abstracting
from change and then introducing an isolated factor to provoke change (p. 248).
But this is not the same as saying that a purpose of ERE is to explain or predict
the direction of change. C-F provide no references to Mises' writings in their
discussion of this point.
It is a misuse of language to employ the terms explain and predict to refer
to what Mises hoped to accomplish by introducing an isolated factor to provoke a change. To most economists, these terms refer to descriptions of actual
economic activity. Economists explain why the price of sugar fell and they
predict the statistical rate of unemployment. In the passages where Mises
discusses change, however, he is not interested in the particular consequences
of a provoking factor change. He is concerned with describing a mental process that can be used by an economist to acquire a personal understanding of
entrepreneurship in a market economy. The change to be provoked is a hypothetical change. The procedure Mises has in mind can be expressed in the
following way. Supposing that products are related to factors of production
according to the theory of imputation implied in the ERE, we want to form
some hypotheses about how the relationships would change if we introduced
a change in the data. Then, having done so, we want to imagine the various
(entrepreneurial) actions that individuals would have to take to cause the relationships to change. Mises defines data as "the bodily and psychological features
of the acting men, their desires and value judgments, and the theories, doctrines, and ideologies they develop in order to adjust themselves purposely to
the conditions of their environment and thus to attain the ends they are aiming at" (p. 646).
The expressions used by C-F to discuss Mises' use of ERE with respect
to "change"—namely, that "the ERE can be used to explain or 'predict' the
direction of change" or that "the ERE is a starting point for the analysis of
particular changes"—mislead the reader. They incline him to think that Mises
was a positivist of some type. Mises criticized positivism.
The C-F discussion of this use focuses on the question of whether there
is a tendency toward equilibrium. It consists of two parts. In the first part,
they appear to criticize Rothbard and, by implication, Mises for claiming that
there is a tendency toward equilibrium (p. 867). Interestingly, however, they
seem to (unwittingly?) echo Mises. Mises says that we should not "disregard
the fact that the market is [continuously] agitated by factors which must result
in further price changes and a tendency toward a different state of rest" (p. 246).
Lest I leave the reader with the wrong impression, it is still true that C-F
and Mises are addressing different issues. The preceding quotation from Mises
should not be interpreted to mean that economists' efforts to predict the direction of a change in price must take "disequilibrating factors" into account. He
is simply not interested in prediction. He is referring instead to the main function
126 • The Review of Austrian Economics, Volume 3
that he believed the ERE serves: the elucidation of entrepreneurial profit and
loss.4 He is saying that to recognize how entrepreneurs contribute to the determination of prices under the conditions specified in his definition of the market
economy, economists must take account of the fact that prices are continually
changing.
The second part of the C-F discussion addresses the view that "there is
a tendency towards equilibrium in a world of frozen data" (p. 867). Mises, in
discussing entrepreneurship, says: "These endeavors of the entrepreneurs would
finally result in the emergence of the evenly rotating economy if no further
changes in the data were to appear" (p. 329). C-F correctly point out (given
their meaning of the word tendency) that "this implies . . . nothing about
whether there is a tendency towards equilibrium in a world where the data
are not frozen." But they reveal their misunderstanding of Mises when they
go on to say that the Mises view would just as easily admit "a tendency toward
disequilibrium." And further: "By allowing the data to change just as it does
in the real world, and 'freezing' all individual learning, we can demonstrate
that the economy would degenerate into a series of successively less-coordinated
states of disequilibrium."
The problem with C-F's criticism is that it is based on a mathematical
definition of equilibrium and not a logical definition consistent with Mises'
pure logic of action. In the logical definition, the concept of disequilibrium
is meaningless. To say that there is a tendency toward disequilibrium is like
saying that individuals do not make choices.
Mises constructed a pure logic of action. In this logic, he sought to deduce
outcomes based on the assumption that individuals choose. It should be evident that, in such a logic, there is no place for a statement that individuals
do not choose. As part of his pure logic of action, Mises also constructed a
logic of entrepreneurial action. This logic sought to identify and elucidate the
entrepreneural discovery of the data and the acts associated with trying to profit
from such a discovery by promoting exchanges. In this logic, there is no place
for a statement that entrepreneurs do not discover and do not try to profit from
their discoveries. \et this is precisely what is implied by the statement that there
is a "tendency toward disequilibrium," at least if one applies this statement to
the ERE. Such a statement implies that the data cannot be discovered or that
a profit cannot be earned by doing so.5
Analysis of Complex Phenomena
The second use of the ERE attributed to Mises by C-F is that the "ERE is
an analytical building block or stepping stone towards analyzing complex
phenomena in a world of change." I think that this is a correct though vague
characterization of Mises' view. However, C-F's criticism of it fails to account
Mises on the Evenly Rotating Economy • 127
both for Mises' own statements on the matter and for Mises' purpose. C-F claim
that such a use of the ERE is open to question because "there are no prices
in the evenly rotating economy" (p. 867). Mises says that the ERE "is a fictitious system in which the market prices of all goods and services coincide
with final prices" (p. 247).
To C-F, it is a contradiction to maintain that we can learn something about
how prices are formed by employing an image which, by definition, assumes
that the prices are already formed. Their discussion in this respect ends with
the rhetorical question: "How can an imaginary construct illuminate an institution [the system of markets and prices] that performs absolutely no function within that construct?" (p. 868).
C-F's misinterpretation on this issue is due to their failure to grasp the fact
that the ERE was employed by Mises solely to elucidate the entrepreneurship
that causes factors of production to exist in a causal relation with wants. Mises'
use of the ERE to elucidate entrepreneurship can be most forcefully shown by
an analogy to a one-person choice. In describing and understanding the nature
of an individual's choice, we would have to have in mind the ends that are sought.
It would be senseless to attempt to describe or understand the deliberation process that precedes a choice, the learning that occurs, the experimentation that
an individual carries out, and so on, unless we had in mind a set of ends the
individual was trying to achieve. Another way to put this is to say that to elucidate
deliberation processes and so on, we must have in mind an end point, namely,
a point at which a choice is made.6 With this idea in mind, we proceed to work
our way back, so to speak, to the activities that an individual can perform to
cause this end point to be reached. It is difficult to conceive of any other way
to proceed. If one merely described physical behavior and labelled it "deliberation," "learning," and so on without at the same time telling the end that was
sought, his descriptions would be impossible to assess.
Similarly, it is essential for the economist to have a series of relative prices,
production operations, and a final distribution of goods in mind when he begins
to explore the signalling and trading processes through which the prices, production, and distribution are achieved. These prices, and so on are merely the
economist's abstract conceptualization of the ends of "consumers" and of the
consequences of the entrepreneurial decisions that enable the ends to be met
in some measure.
It is true that one can hardly conceive of the ends of all consumers and
of the many interdependent entrepreneurial decisions that cause them to be
achieved. Nevertheless, without such a conceptualization, the whole notion
of economic interaction itself dissolves into a fruitless analogy with nonhuman
systems. The burden of the economist is to devise means of making such conceptualizations, however imperfect they must be.
Since Mises regarded the ERE as the outcome of a choosing process
that involved entrepreneurship, it is easy to answer C-F's rhetorical question.
128 • The Review of Austrian Economics, Volume 3
Entrepreneurship, the cause of the prices, can only be understood if we have
in mind a pattern of prices, production operations, and a final distribution
of goods. The ERE is such a pattern.
Analysis of Changes
The third use to which the ERE has been put, according to C-F, is that the
"ERE is a starting point for an analysis of the effects of particular changes"
(p. 866). They take this to refer to the analysis of the effects of an exogenous
shock upon the economic system. I noted previously that Mises speaks of introducing an isolated factor to provoke change, but that by change he meant a
change in desires, value judgments, and so on. However, I do not think that
a change in these data is what most economists mean by an exogenous shock.
Whereas a change in the data suggests the logical method, an exogenous shock
suggests the mathematical method.
The mathematical method of representing equilibrium assumes that individuals operate according to maximization rules. Such operations cause
"economic variables" to be deducible from a given set of parameters. An exogenous shock is synonymous with a change in a parameter. The effect of such
a shock is a change in the values of the variables. The solution describes the
direction and/or size of the change in values.
The logical method sees equilibrium as a relationship between products
and factors of production—a theory of imputation. It is assumed that the relationship is a consequence of profit-seeking entrepreneurial choices, but the
equilibrium reveals nothing about the nature of those choices. To discover what
they are, the economist must imagine some change in the data. Then, by projecting himself into the positions of different individuals who buy the products
and supply the factors of production, he must ask how he could avoid a loss
or earn a profit. It should be obvious that to employ the term exogenous shock
to refer to a change in the data in this context is likely to be misleading.7
Beyond this, C-F make a mistake when they introduce an example to illustrate what they take to be the contradictory nature of ERE. Their example
is the Austrian theory of the trade cycle. They say that "using the ERE analysis
as a starting point for the analysis of monetary intervention (for example,
Rothbard and Mises' business cycle theory) involves the contradiction of
superimposing an increase in the money supply upon an essentially moneyless
world" (p. 868). This statement cannot be squared with Mises' trade-cycle
theory. In a section where he introduces a discussion of a change in the quantity of money, Mises clearly acknowledges that money is incompatible with
the ERE (p. 417). It would be stretching the imagination to suppose that having said this (and having referred the reader to an early section where the same
point was made), Mises would proceed to superimpose an increase in the money
Mises on the Evenly Rotating Economy • 129
supply upon an essentially moneyless world. The fact is that Mises superimposes the increase on a changing world in which money is already employed
as a means of signalling and reckoning. In short, Mises does not use the ERE
to describe the trade cycle.
In considering how Mises described entrepreneurship in the study of
economic change, one should be careful not to conclude that this was Mises'
only conception of entrepreneurship. In the theory of economic change, one
begins with a starting point in which certain factors and goods are already being produced and used, in which certain markets are already created, and in
which data are defined by the economist and do not need to be discovered.
The range of activities that are involved in reaching an end point under such
circumstances is obviously limited. There is no reason, however, why the praxeological method should limit itself to such a rigid starting point. One may start
with a situation in which there is a complete absence of markets, an absence
of previously produced factors, and an initial absence of knowledge of others'
wants, abilities, and knowledge. Entrepreneurship can then be imagined to identify the data, create markets, and produce factors and goods such that an ERE
is eventually established. Mises does not emphasize this point and most of his
discussions of entrepreneurship are limited to the context of economic change.
Nevertheless, the point is evident from his remarks. 8
ERE as a Foil
The fourth use to which C-F claim Mises and Rothbard put the ERE is as
a "foil." The word foil is ambiguous. Mises does not use the term so far as
I know. As a result, I was unable to find the proper reference for the C-F
criticism.9 The term itself seems to suggest that Mises uses the ERE as a sort
of strawman against which to pit his own approach to economic phenomena.
This interpretation, however, is not consistent with the C-F discussion. C-F's
discussion uses the term foil in the same sense that Mises uses the term argumentum a contrario}®
The argument that C-F make claims in essence that Mises' argumentum
a contrario is nonsensical: "If, as Mises claims . . . the ERE has no human
action, then we cannot claim there is a tendency towards equilibrium, since
this would imply the nonsensical conclusion that there is a tendency for human
action (and human institutions) to disappear" (p. 868). The error here is C-F's
failure to recognize that the ERE is regarded by Mises as an imaginary or
hypothetical consequence of entrepreneurial choices, not as a descriptive or
mathematical model. There is nothing nonsensical about saying that economists
can better (or only) understand entrepreneurship by contrasting a state in which
there is a motivation for entrepreneurial action with an imaginary state in which
the motivation is no longer present. It is, of course, nonsence to argue that the
130 • The Review of Austrian Economics, Volume 3
state in which entrepreneurial action is present is like the state in which it is
not present.
C-F are not alone in their misinterpretation of Mises' argumentum a contrario. O'Driscoll and Rizzo (1985) say that "from Mises' perspective, the exact equilibrium construct merely provides us with a clue as to why certain results
do not obtain. Hence it is capable of only negative prediction. It does not
elucidate the actual processes by which those states may be achieved." They
go on to say that Mises' method "does not permit us to offer a logically sufficient explanation for the 'failure' of actual processes" (p. 82).
The language O'Driscoll and Rizzo (O-R) use, like that of C-F, conjures
up the image that the nature of the processes through which equilibrium is
achieved is a scientific mystery. This language misleads the reader about Mises'
intent. In using the ERE as an argumentum a contrario, Mises was not interested
in determining why equilibrium was not reached, in providing a clue as to why,
or in making predictions. His sole concern with the equilibrium model was
to employ the model's implicit theory of imputation as a framework for identifying entrepreneurship.
Rather than a foil, the argumentum a contrario is like an infrared lens that
makes it possible to identify a phenomenon that cannot be identified in any
other way. To be sure, it does not guarantee that what one sees is what he
believes he sees. But without the lens, he would be unable to see anything at all.
Conclusion
In my view, Mises' Human Action is at the same time the most important
economics book of this century and the easiest to misunderstand. Among its
many contributions is its correct statement of the meaning and usefulness of
the concept of static equilibrium, or evenly rotating economy, in economic
analysis. Mises' argument was that the ERE is an end point—a complex relationship between consumers' subjective values and factors of production.
Without a theory that contains such an end point, it would be impossible
to make sense of the entrepreneurial actions and the consequences that are so
readily observable in a market economy. Our observations would be facts without
a theory—or, more correctly, they would be meaningless accounts. We could
not distinguish them from any other observations. In short, whenever we say
"X is a resource" (or "C is a cost"), we must, in the backs of our minds, have an
idea of the wants X will help to satisfy (the want satisfaction that must be foregone) and the entrepreneurial activity that caused the relation between X (C)
and the want to come into existence. "X is a resource" has no other meaning.
And we could not properly say that X is a resource unless this is what we mean.
The ERE is simply a means of conceptualizing a combination of exchanges.
As we attempt to work our way back from the ERE, we must identify the ultimate
Mises on the Evenly Rotating Economy • 131
ends, the intermediate ends, the separate exchanges, and "means of coordination" within a "real" market economy. As the entrepreneurial activities that
might lead the ends to be achieved are identified, a theory of imputation unfolds in which one learns the wide range of factors of production that contribute to the satisfaction of wants. One also learns how these factors would
not exist and the wants would not be satisfied without entrepreneurial action.
The fundamental error made by C-F might be stated as follows. They were
interested in the question of whether the ERE is a useful model of prices, outputs, and other variables typically identified in the simultaneous equations of
the mathematical models of static equilibrium. They interpreted the ERE as
an abstrct representation of a real economy which contained these variables.
Then they asked whether it was a useful abstraction. Their answer was no,
the same answer that Mises himself gave. They neglected to ask, however,
whether the ERE is a useful reference for helping one identify and describe
the entrepreneurial actions that are intended to cause exchanges to occur. They
also neglected to identify this purpose as the only one that Mises felt the ERE
was equipped to help the economist accomplish. Without the ERE, Mises
argued, there would be no way to identify and discuss entrepreneurship. Failing to identify why Mises used the ERE and focusing on a purpose for which
they believed it should be used, they completely misinterpreted and misrepresented Mises' views.
Mises warned users of the ERE. He pointed out that the method of imaginary constructions, of which ERE is an example, "leads along a sharp edge:
on both sides yawns the chasm of absurdity and nonsense. Only merciless selfcriticism can prevent a man from falling headlong into these abysmal depths"
(p. 237).
Notes
1. See Mises, Human Action, 1966, p. 239.
2. The following passages from Mises (1966) are significant in supporting this
interpretation of the distinction between the mathematical and the logical methods:
The mathematical economists [who have adopted the mathematical method as opposed
to the logical methodj disregard dealing with the actions which . . . are supposed to
bring about the evenly rotating economy, (p. 250)
In other words, they disregard entrepreneurship.
Now, the mathematical economist does not contribute anything to the elucidation of
the market process [i.e., the process in which entrepreneurship is the driving force].
He merely describes an auxiliary makeshift [the ERE] employed by the logical
economists as a limiting notion, the definition of a state of affairs in which there is
no longer any action and the market process has come to a standstill. That is all he
can say. What the logical economist sets forth in words when defining the imaginary
constructions of the final state of rest and the evenly rotating economy and what the
mathematical economist himself must describe in words before he embarks upon his
mathematical work, is translated into algebraic symbols.
132 • The Review of Austrian Economics, Volume 3
Both the logical and the mathematical economists assert that human action ultimately aims at the establishment of such a state of equilibrium and would reach it if
all further changes in the data were to cease. But the logical economist knows much
more than that. He shows how the activities of enterprising men, the promoters and
speculators, eager to profit from discrepancies in the price structure, tend toward
eradicating such discrepancies and thereby also toward blotting out the sources of entrepreneurial profit and loss. . . . This is the task of economic theory. . . . The problem is the analysis of the market process.
The mathematical method is at a loss to show how from a state of nonequilibrium
those actions spring up which tend toward the establishment of equilibrium, (pp. 355-56)
3. I find it quite puzzling that Israel Kirzner has not emphasized the logical method
and the evenly rotating economy in his writings on entrepreneurship. It is beyond the
scope of this article to enter into a discussion of the nature of entrepreneurship. Suffice
it to say at the moment that in the author's view, there appears to be a substantial
difference between the method of identifying entrepreneurship used by Mises and that
used by Kirzner. See Gunning (1988).
4. Mises says this repeatedly throughout his book. I think, however, that his
most complete statement is on p. 248.
These insoluble contradictions [that change is eliminated in the ERE, that the ERE
is not peopled with living men and that real action does not correspond to the ERE],
however, do not affect the service which this imaginary construction renders for the
only problems for whose treatment it is both appropriate and indispensable: the problem of the relation between the prices of products and those of the factors required
for their production, and the implied problems of entrepreneurship and of profit and loss.
In short, Mises sees ERE as a starting point for a theory of imputation in which the
principal consideration is profit seeking by the entrepreneur.
5. This interpretation appears consistent with the only reference I could find
to disequilibrium in Mises' Human Action (p. 431).
6. This interpretation is consistent, I believe, with the only other statement I
could find that could possibly be misinterpreted. In speaking of the ERE, Mises says
that "in order to analyze the problems of change in the data and of unevenly and irregularly varying movement, we must confront them with a fictitious state in which both
are hypothetically eliminated" (p. 247). Keeping in mind Mises' meaning of data, this
statement cannot mean, I maintain, that the ERE can be used to explain or "predict"
the direction of change or that the ERE is a starting point for the analysis of particular
changes unless by change one means a change in desires, value judgments, and so on.
7. A critic might claim textual support for the view that Mises did not use the
term ERE to refer to an end point. Instead, the critic would say, he used the concepts
of the final state of rest and the final price to refer to this. Consider specifically the
following quote:
In dealing with the plain state of rest, we look only at what is going on right now.
We restrict our attention to what has happened momentarily and disregard what will
happen later. We are dealing only with prices really paid in sales, i.e., with the prices
of the immediate past. We do not ask whether or not future prices will equal these prices.
But now we go a step further. We pay attention to factors which are bound to
bring about a tendency toward price changes. We try to find out to what goal [!] this
tendency must lead before all its driving force is exhausted and a new state of rest
emerges. The price corresponding to this future state of rest was called the natural price
by older economists; nowadays the term static price is often used. In order to avoid
misleading associations it is more expedient to call it the final price and accordingly
to speak of the final state of rest. (p. 245)
Mises on the Evenly Rotating Economy
• 133
The imaginary construction of the final state of rest is marked by paying full regard
to change in the temporal succession of events. In this respect it differs from the imaginary construction of the evenly rotating economy, which is characterized by the
elimination of change in the data and of the time element. . . . The evenly rotating
economy is a fictitious system in which the market prices of all goods and services coincide
with the final prices. . . . The same market transactions are repeated again and
again. . . . The plain state of rest is disarranged again and again, but it is instantly
reestablished at the previous level. . . . [In constructing the evenly rotating economy],
[w]e are free to assume that infants are born, grow old, and finally die, provided that
total population figures and the number of people in every age group remain equal.
Then the demand for commodities whose consumption is limited to certain age groups
does not alter, although the individuals from whom it originates are not the same. (pp.
246-47)
The suggestion here is that the ERE is what might be called an "actionless
economy." It appears to be a model of an economy in which there is no action, only
repetitive behavior. "Automatic action is substituted for the conscious striving of thinking
man after the removal of uneasiness" (p. 249).
In this preliminary discussion of the usefulness of the ERE (pp. 246-50), Mises
does not indicate that he intends to use the ERE as an end point. Here he suggests
only that by contrasting an image of a rigid economy such as the ERE with our
knowledge of economic interaction in everyday life, "we are led to the insight that dealing
with the uncertain conditions of the unknown future . . . is inherent in every action"
(p. 250). This means that we are led to the insight that entrepreneurship exists in everyday life.
Following these preliminary statements, however, it is clear that Mises proceeds
to use the ERE as an end point. Consider the following discussion of the prices of factors:
The tasks incumbent upon the theory of prices of factors of production are to be solved
by the same methods which are employed for treatment of the prices of consumers'
goods. We conceive the operation of the market of consumers' goods in a twofold way.
We think on the one hand of a state of affairs which leads to acts of exchange: the
situation is such that the uneasiness of various individuals can be removed to some
extent because various people value the same goods in a different way. On the other
hand, we think of a situation in which no further acts of exchange can happen because
no actor expects any further improvement of his satisfaction by further acts of exchange.
We proeed in the same way in comprehending the formation of the prices of factors
of production. The operation of the market is actuated and kept in motion by the exertion of the promoting entrepreneurs, eager to profit from differences in the market
prices of the factors of production and the expected prices of the products. The operation of this market would stop if a situation were ever to emerge in which the sum
of the prices of the complementary factors of production—but for interest—equaled
the prices of the products and nobody believed that further price changes were to be
expected. Thus we have described the process adequately and completely by pointing
out, positively, what actuates it and, negatively, what would suspend its motion. The
main importance is to be attached to the positive description. The negative description
resulting in the imaginary constructions of the final price and the evenly rotating economy
is merely auxiliary. For the task is not the treatment of imaginary concepts, which never
appear in life and action, but the treatment of the market prices at which the goods
of higher orders are really bought and sold. (p. 334) (emphasis added)
Mises goes on to attribute the method to Gossen, Carl Menger, and Bohm-Bawerk.
Also consider the following discussion of changes that are initiated by an increase in saving.
All these changes in the prices of factors of production begin immediately with the initiation of the entrepreneurial actions designed to adjust the processes of production
134 • The Review of Austrian Economics, Volume 3
to the new state of affairs. In dealing with this problem as with the other problems
of changes in the market data, we must guard ourselves against the popular fallacy
of drawing a sharp line between short-run and long-run effects. What happens in the
short-run is precisely the first stages of the chain of successive transformations which
tend to bring about the long-run effects. The long-run effect is in our case the disappearance of entrepreneurial profits and losses. The short-run effects are the preliminary
stages of this process of elimination which finally, if not interrupted by a further change
in the data, would result in the emergence of the evenly rotating economy, (p. 296)
(emphasis added)
Finally, Mises' approach should be evident from the introductory statement
to his section entitled "The State of Rest and the Evenly Rotating Economy":
The only method of dealing with the problem of action is to conceive that action ultimately aims at bringing about a state of affairs in which there is no longer any further
action, whether because all uneasiness has been removed or because any further removal
of felt uneasiness is out of the question. Action thus tends toward a state of rest, or
absence of action, (p. 244)
8. Anyone who doubts that Mises conceived of entrepreneurship so broadly
should consider Mises' discussion of the promoter. In this discussion, he begins by
distinguishing the entrepreneur from the capitalist-landowner and the worker. He says
that the purpose of this is to identify a functional distribution. In this division of functions, the "[entrepreneur means acting man in regard to the changes occurring in the
data of the market" (p. 254). Then he goes on.
Economics, however, always did use the term entrepreneur in a sense other than that
attached to it in the imaginary construction of the functional distribution. It also calls
entrepreneurs those who are especially eager to profit from adjusting production to
the expected changes in conditions, those who have more initiative, more venturesomeness, and a quicker eye than the crowd, the pushing and promoting pioneers
of economic improvement. This notion is narrower [!] than the concept of an entrepreneur as used in the construction of the functional distribution; it does not include many instances which the latter includes, (pp. 254-55)
9. The term foil is apparently taken from Hayek (1941). Hayek states that "it
is only by contrast with this imaginary state, which serves as a kind of foil, that we
are able to predict what will happen if entrepreneurs attempt to carry out any given
set of plans" (p. 23). Interestingly, Hayek also stresses the idea, repeated by C-F and
attributed to Mises, that "[t]he ERE can be used to explain or 'predict' the direction
of change" (p. 866). This is not the place to describe what I believe to be a substantial
difference between Hayek's belief about the usefulness of equilibrium and Mises' belief.
10. Mises says that we can only discover the conditions of "a living world in which
there is action" (which means the kind of economic reality that contains a variety of
entrepreneurial activities) "by the argumentum a contrario provided by the image of
a rigid economy" (p. 250).
References
Cowen, Tyler, and Richard Fink. "Inconsistent Equilibrium Constructs: The Evenly
Rotating Economy of Mises and Rothbard," American Economic Review, vol.
75 no. 4 (September 1985).
Gunning, J.P. The Failure of the New Subjectivist Revolution, 1988, forthcoming.
Hayek, F.A. The Pure Theory of Capital. Chicago: University of Chicago Press, 1941.
Mises on the Evenly Rotating Economy • 135
Mises, Ludwig von. Human Action: A Treatise on Economics. Chicago: Contemporary
Books, 1966.
O'Driscoll, Gerald P., and Mario J. Rizzo. The Economics of Time and Ignorance.
New York: Basil Blackwell, 1985.
Rothbard, Murray. Man, Economy, and State. Los Angeles: Nash, 1962.